CHINA plans to ban trading of bitcoin and other virtual currencies on domestic exchanges, dealing another blow to the US$150 billion cryptocurrency market after the country outlawed initial coin offerings last week.

The ban will only apply to trading of cryptocurrencies on exchanges, according to sources familiar with the matter. Authorities don’t have plans to stop over-the-counter (OTC) trading of virtual currencies, the sources said. The central bank said it couldn’t immediately comment.

Bitcoin slumped Friday after Caixin magazine reported China’s plans, capping the virtual currency’s biggest weekly retreat in nearly two months. The country accounts for about 23 percent of bitcoin trades and is also home to many of the world’s biggest bitcoin miners, who confirm transactions in the digital currency.

“Trading volume would definitely shrink,” said Zhou Shuoji, Beijing-based founding partner at FBG Capital, which invests in cryptocurrencies. “Old users will definitely still trade, but the entry threshold for new users is now very high. This will definitely slow the development of cryptocurrencies in China.”

Bitcoin has jumped about 600 percent in U.S. dollar terms over the past year, part of a broad surge in virtual currencies that has fueled concerns of a bubble. The People’s Bank of China has done trial runs of its own prototype cryptocurrency, taking it a step closer to being the first major central bank to issue digital money.

“There has been a general tightening of the screw on regulating financial and monetary conditions,” said Mark McFarland, chief economist at Union Bancaire Privee SA HK in Hong Kong. “All of these things suggest a longer term process of tightening scrutiny of activities that aren’t in the normal sort of monetary realm.”

OKCoin, BTC China and Huobi, the country’s three biggest bitcoin exchanges, said yesterday that they hadn’t received any regulatory notices concerning bans on cryptocurrency trading. All three venues reported transactions yesterday.

While bitcoin users will still be able to trade cryptocurrencies in China without exchanges, the process is likely to be slower and come with increased credit risk, analysts said.

The exchange ban is unlikely to have a major impact on the prices of cryptocurrencies because venues outside China will continue trading, according to Zhou. (SD-Agencies)